The 80-120 Rule, and How It Affects Your Annual 401(k) Plan Reporting
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Are you required to audit your 401(k) plan? The answer lies in what is known as the 80-120 rule. If your organization offers a qualified retirement plan with fewer than 120 participants, as of the 1st day of the plan year, the answer is no. Your organization doesn't need a plan audit. However, if you have 80-120 participants, federal law does require that your organization file a Form 5500 to report on the plan's financial conditions, investments, and operations.
What you need to know about Form 5500
When filing Form 5500, your organization will need to choose to submit as either a “large plan” or “small plan,” based on the number of participants in the plan. This can be tricky since the number of participants in a plan can vary from year to year and within a year. Again the answer lies in the 80-120 rule. The 80-120 rule allows organizations to file their Form 5500 in the same size category they filed in the previous year. For growing businesses, this means your organization may be able to file without a required audit, allowing your organization to concentrate on growth.
Note that your organization must count employees as participants on the date they become eligible to participate in the plan, whether or not they actually choose to participate. In addition, the 80-120 rule specifies that an organization’s participant count must include:
actively participating employees,
retired, deceased, or separated employees who still have assets in the plan, and
all eligible employees who have either yet to enroll or have elected not to enter the plan.
| Do You Need a 401(k) Plan Audit? Here’s What the 80-120 Rule Says | |||
|---|---|---|---|
| # of Eligible Participants on 1st Day of the Plan Year |
Financial Schedule Filed with Prior Year Form 5500 |
Options for Current Year Form 5500 |
Audit Required? |
| <80 | Does not matter | Small Plan - Schedule I | No |
| 80-99 | Small Plan - Schedule I Large Plan - Schedule H |
Small Plan - Schedule I Either Schedule H or I |
No Optional* |
| 100-119 | Small Plan - Schedule I Large Plan - Schedule H |
Either Schedule H or I Large Plan - Schedule H |
Optional* No |
| >120 | Does not matter | Large Plan - Schedule H | Yes |
*Audits are always required if you elect to file as a large plan using Schedule H. File Schedule I to avoid the audit requirement in these circumstances.